An ex-Googler grew his shopping startup into a $23 billion empire in under 4 years. One early investor explains how he did it.

In just three and half years, the Chinese e-commerce platform Pinduoduo grew from a burgeoning direct-to-consumer delivery service into a multibillion-dollar company with a successful initial public offering under its belt. When the Shanghai-based startup went public in late July, its stock soared to nearly $27 a share— 41% higher than the company originally anticipated — making Pinduoduo worth nearly $24 billion.

Its remarkable growth is the result of a confluence of factors, says Ron Cao, a partner at the Shanghai-based venture firm Sky9 Capital who has helped oversee much of Pinduoduo's growth since his firm led the e-commerce platform's Series B funding round in 2015.

At the time of Sky9's investment, Cao said, Pinduoduo was a fast-growing e-commerce platform primarily focused on selling affordable, perishable fruits.

Pinduoduo's CEO, the former Google engineer Colin Huang, has described his company as "a combination of Costco and Disneyland" that sells low-cost products to shoppers through bulk suppliers. When a group buys an item, the platform ships it directly from the supplier at a competitive price.

In an interview with Business Insider, Cao broke down how Pinduoduo became such an instant success.

1/

Pinduoduo is focused on the right geographical market.

While Huang has spent several years working at Google in the US, the CEO's ambitions have always been focused on China, Cao said.

In China, Cao said, the e-commerce market is ripe for innovation.

"Everyone is on mobile, and mobile payments are so easy," he said. "I don't have to carry my wallet when I walk around in China. You can charge everything to your phone — even small shops on the side of the street will have a scan."

Popular social platforms like WeChat also helped set the groundwork for Pinduoduo's success, Cao said.

"Five or 10 years ago, this wouldn't have taken off," he said. "Whatever Pinduoduo is trying to do couldn't have happened without that infrastructure."

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It found a way for users to share on the platform.

"Pinduoduo went viral immediately," Cao said.

Because the platform offers steeply discounted products to a group of buyers rather than individual shoppers, users were incentivized to share an item with their friends to get a better deal.

"People formed groups. It intentionally forced you to get other people involved," Cao said. "Even today, you can't buy something for yourself. You have to join a group."

Cao said Pinduoduo's social element was crucial to its success — and a key factor in what his firm looks at in other companies to determine their potential.

This type of social commerce incentive can spur enormous scale, Cao said. "When a platform incentivizes users to push a product on to someone else, it has the ability to go viral."

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Pinduoduo is focused on products that people buy frequently.

When Cao's firm first invested in Pinduoduo, the platform was focused almost entirely on selling perishable fruits.

Fresh fruit, Cao said, is the type of high-frequency purchase that helped the company take off with new users.

In China, "people like to buy fresh fruit every day," Cao said. "This allowed Pinduoduo to learn how these things work. Fruit is a very difficult market because it's so perishable. Users were able to buy very quickly. It was a challenging experience that helped them learn how things work very fast."

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The CEO has experience and a vision.

Cao said Sky9 Capital was just as focused on investing in companies as it is on investing in entrepreneurs. For Cao's firm, Huang was an ideal investment.

"The quality of entrepreneur is great," Cao said of Huang. "It's his fourth time building a company. He's a serial entrepreneur. He was one of the top students in one of the top grad programs. He spent time at Google. He understands how international firms work, and he gets the global market."

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With dominant players like Alibaba in China's e-commerce industry, now is an ideal time for disruption.

"Our experience as a VC firm is that when the market feels like the dominant players have taken over, it's usually a good time to look at new opportunities in that field," Cao said.

"When dominant players are so entrenched, they're not usually in a good position to innovate," he added. "At that point, they're in a position of defense. That's when it's time to find a company that can attack a weak spot and find a new way of doing business."

Pinduoduo, Cao said, took a fresh approach to e-commerce that other industry players hadn't employed so successfully.

"Pinduoduo didn't go after the market directly," Cao said. "It found new rule of engagement. It showed that shopping could be more fun, more efficient, and more interactive."